Stock manipulation and its impact on market quality

Using a new hand-collected data set, this study examines the stock price manipulation in the Taiwan Stock Exchange (TSE). We examine the characteristics of the manipulated stocks, and their impacts on market quality. The results show that manipulated stocks tend to be small. The stock prices rise throughout the manipulation period, followed by a price reversal. The average cumulative abnormal return of the manipulated stocks is over 70 percent, which is far higher than that found in the developed markets but similar to emerging market circumstances. In addition, manipulated stocks display increased return continuation conditional on high trading volume, and increased volatility of stock price conditional on high liquidity of market during the manipulation period. Market depth is also worse during the manipulation period. This suggests that stock manipulation can actually create market inefficiency, lead to both abnormally high trading volume and volatility, worsen the market depth, and hence have important impacts on market quality. JEL classification: G14; G15